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Before making a major financial decision you
should consult a qualified professional.

Make a Budget

Making a budget is usually not much fun, and sticking to
it might not be easy. However, this is an important step. You must be a good
manager of your money in order to have the financial
freedom to do whatever you want.

In order to prepare a budget, it is important to track
your spending to see what your expenses are. You can
do this on paper, or on the computer in a spreadsheet.
If you don't have spreadsheet software, you can use the free Google
Sheets.
You could also use a software program such as Quicken™ or
Microsoft® Money.

Once you know where your money is being spent, you can
allocate a certain amount of money to each spending
category. If you are spending more than you are
making, or if you are not using at least 10% of your gross
income to pay yourself
first, then you need to reduce or eliminate
some expenses. For expenses that are paid annually,
save 1/12th of the total each month.

The first thing you should do (if you don't have debt
with over 8% interest) is to get your employer to deduct your pay yourself
first money from your pay, and
transfer it directly to an RRSP. By making this a
payroll deduction, the income tax taken from your pay
will be reduced. See our article on Recommended
stocks/ETFs for how to make 9% on your RRSP.

You should monitor your progress by periodically making a
summary of your net worth. To calculate your net
worth, you simply add up the value of your major
assets and any investments, and deduct any debts. To make this task
easier, try our Net Worth Calculator, which can be found on the Calculators
page.

Net Worth Summary

Assets

Value

House

$300,000

Vehicle

8,000

RRSPs

10,000

Chequing account

250

Total assets

$318,250

Liabilities

Mortgage

$254,000

Car loan

3,700

Credit card debt

4,800

Total liabilities

$262,500

Net worth

$55,750

This couple obviously didn't read our website
before they took out a car loan and ran up their credit card
debt, but they are on the right track now. They are
paying themselves first with the 10% of gross income, which
they are using to make extra payments on their highest
interest debt (credit card). They have reduced some
other expenses in order to do that. Once they have the
credit card debt paid off, they can pay the $700 per month
(pay yourself first) on the car loan. They will also
have $240 more per month from the credit card debt payments,
which they can use to pay down their car loan faster and/or
allocate to other expenses. Once the car loan is paid
off, they can use the $700 per month as extra payments on
the mortgage or to invest in RRSPs, and use the $300 per month car payment to save
for a new car.

Tax Tip: Stick to your
budget.

If you do not
own a home, you have no debt, and you have already put aside your emergency
money, put a further $25,000 into your RRSP. This can be
withdrawn under the Home
Buyer's Plan when you buy your first home. Any other savings for your down payment should be saved
in a Tax-Free
Savings Account (TFSA). Once you own a home, you should use
the pay yourself first money to make extra
payments on your mortgage, or invest in RRSPs.

If you have children or grandchildren, it is never too
early to start teaching them how to budget their
money. This can be as simple as giving them an
allowance, and teaching them to allocate their money.
When they are very young, start by giving them a small
amount of money which can be used for discretionary
spending, long term savings, and special occasions. As
they get older, their allowance can increase, and they can
be responsible for paying for their own sporting activities,
clothing, and gifts.